The Wall Street Journal - 09.03.2020

B8| Monday, March 9, 2020 THE WALL STREET JOURNAL.

THE TICKER |Market events coming this week

Monday

Earnings expected

Estimate/YearAgo($)

Casey’s General Stores

0.89 /1.13

Franco-Nevada 0.49 /0.24

Thor Industries 0.72 /0.65

Vail Resorts 5.45 /5.02

Tuesday

Short-selling reports

Ratio,daysof trading volume of

currentposition,at Feb. 14

NYSE 4.3

Nasdaq 3.8

Earnings expected

Estimate/YearAgo($)

Reynolds Consumer

Products 0.53 /n.a.

Wednesday

Consumer price index

All items, Jan. up 0.1%

Feb., expected 0.0%

Core, Jan. up 0.2%

Feb., expected up 0.2%

EIA status report

Previouschangein stocks in

millionsof barrels

Crude oil up 0.8

Gasoline down 4.3

Distillates down 4

Mort. bankers indexes

Purch., previous down 3%

Refinan., prev. up 26%

Treasury budget

Feb. ‘19

$234.0 bil. Deficit

Feb.’20 expected

n.a.

Earnings expected

Estimate/YearAgo($)

Wheaton Precious

Metals 0.17 /0.08

Thursday

EIA report: natural gas

Previouschangein stocks in

billionsof cubic feet

down 109

Initial jobless claims

Previous 216,000

Expected 218,000

Producer price index

All items, Jan. up 0.5%

Feb., expected 0.0%

Core, Jan. up 0.5%

Feb., expected up 0.2%

Earnings expected

Estimate/YearAgo($)

Adobe 2.23 /1.71

Broadcom 5.34 /5.55

Dollar General 2.01 /1.84

Gap 0.41 /0.71

Oracle 0.96 /0.87

Ulta Beauty 3.73 /3.61

Friday

Import price index

Jan., previous 0.0%

Feb., expected down 1.0%

U.Mich. consumer index

Feb., final 101.0

Mar., prelim 96.0

* FACTSET ESTIMATES EARNINGS-PER-SHARE ESTIMATES DON’T INCLUDE EXTRAORDINARY ITEMS (LOSSES IN

PARENTHESES)  ADJUSTED FOR STOCK SPLITNOTE: FORECASTS ARE FROM DOW JONES WEEKLY SURVEY OF

Gap is expected to report a decline in per-share earnings on Thursday. Old Navy’s store in Times Square. ECONOMISTS

BRENDAN MCDERMID/REUTERS

on risk.

Some are even beginning to

“fade” trades—industry par-

lance for backpedaling from

agreed-upon deals.

The pain is also being felt

in the Treasury market, where

high-frequency trading algo-

rithms have pulled back as

volatility increased. According

to Priya Misra, head of rates

strategy at TD Securities, li-

MARKETS

erations that include extend-

ing near-term loans to corpo-

rate clients.

At the same time, a mea-

sure of the premium investors

will pay for dollars—known as

the cross-currency basis—in-

creased for the first time in

years. Traders and salespeople

at Barclays PLC , UBS Group

AG and Morgan Stanley said

such a move usually reflects a

shortage of dollars available, a

circumstance that was last

acute when a sovereign-debt

crisis gripped Europe in 2011.

“Dollar funding is always

the orphaned child of crises as

the regions where the pres-

sures flare up have no control

over it,” said Credit Suisse

Group AG analyst Zoltan Poz-

sar. Investors often use dollars

to fund foreign investments.

Additionally, traders at

large asset-management firms

said they are having more

trouble trading a variety of fi-

nancial instruments, from cor-

porate bonds to derivatives.

One said the difference be-

tween what buyers wanted to

pay and what sellers were

willing to receive for invest-

ment-grade bonds is widening,

with banks less willing to take

quidity in the Treasury market

is bifurcated and stressed be-

cause of this phenomenon.

“When volatility picks up,

the high-frequency traders

step away,” said Ms. Misra.

“It’s not a deep market."

Investors and bankers are

concerned enough that they

are studying options the Fed

could take to ease jumpy mar-

kets that go beyond rate cuts.

Many traders believe such cuts

are an inadequate tool to fix a

problem rooted in short-term

supply-chain shocks that could

leave companies short of cash

to make payments on debt and

other obligations.

“During the financial crisis,

the Fed didn’t employ the

same cookie-cutter responses

that central banks in the 1980s

used,” said Rick Rieder, chief

investment officer of global

fixed-income at BlackRock Inc.

“The market will react to in-

novative ideas that are tar-

geted at stabilizing the near-

term problem.”

Mr. Rieder said the Fed

could purchase longer-dated

assets as it did in some post-

financial-crisis operations, or

buy municipal bonds, mort-

gages and other unconven-

tional assets.

“I don’t think they need to

execute that sort of option to-

day, but overall the Fed has

tremendous leeway to operate

in,” he said.

Such possibilities aren’t

just idle trader talk. Federal

Reserve Bank of Boston Presi-

dent Eric Rosengren said Fri-

day that to provide stimulus,

the Fed may need the power

to buy a broader array of

bonds beyond Treasurys and

mortgage-backed securities.

Operational risks posed by

the coronavirus are an addi-

tional source of worry. Banks

and investment firms could be

forced to close central trading

hubs and scatter employees to

remote locations, some of

which hadn’t been tested for

some time until last week.

If financial institutions be-

gin implementing contingency

plans that make trading more

difficult because traders are

working remotely or from

multiple backup locations,

“the possibility for some kind

of operational slowdown or

malfunction gets high,” said

Nellie Liang, a former senior

Fed economist who is now at

the Brookings Institution.

Some smaller broker-deal-

ers are extending overnight

repo trades into the future, as

evidenced by an esoteric mea-

sure called the general collat-

eral term structure. This is

presumably to reduce risks as-

sociated with large dealers

asking employees to work

elsewhere, said Josh Younger,

head of interest rate deriva-

tives strategy at JPMorgan

Chase & Co.

Banks spent the past week

ratcheting up plans to prevent

the coronavirus from rapidly

spreading among employees.

Morgan Stanley, UBS and JP-

Morgan are among banks

splitting global markets work-

forces into groups working out

of locations spanning from

Stamford, Conn., to Edison,

N.J.,—or remotely from home.

At Goldman Sachs Group

Inc., a group of traders would

remain in the firm’s downtown

Manhattan headquarters—but

scattered between empty

desks to avoid contamina-

tion—while others would

move to remote locations, a

person familiar with the mat-

ter said.

—Matt Wirz

contributed to this article.

Banks and other firms are

growing cautious operating in

short-term markets, a sign of

the financial stress brought on

by the coronavirus epidemic.

Short-term lending markets

are the plumbing of the finan-

cial system, moving large vol-

umes of cash from those who

have it to those who need it.

Confidence in their ability to

function smoothly is integral

to the performance of the

wider financial system. Hic-

cups can lead to increased vol-

atility and strain.

One area of recent note is

the market in which firms bor-

row and lend cash through

agreements to repurchase

Treasury securities. Rates in

the repo market are measured

against the Federal Reserve’s

short-term benchmark. Last

week the difference between

the two, or the spread, wid-

ened to levels not seen since

November.

The repo market is where

firms such as hedge funds bor-

row to finance their invest-

ments and money-market

funds earn returns on piles of

cash. It also supports bank op-

BYJULIA-AMBRAVERLAINE

Short-Term Loan Sector Worries Banks

Amarketmeasureofbanking

systemstresshasclimbed

recently.

Three-monthLibor-OISspread*

Source: Deutsche Bank

*London interbank offered rate minus

overnight indexed swaps

60

0

20

40

basis points

2016 ’17 ’18 ’19 ’20

RETIREMENT REPORT|By Anne Tergesen

To Ease Stock-Turmoil Jitters, Try These Strategies

Like it or

not, many re-

tirees depend

on the stock

market to

cover some of

their financial needs.

When the market becomes

volatile, as it has amid fear

of the coronavirus epidemic,

many get nervous.

“Watching 10% of a stock

portfolio disappear in a week

is jarring,” said Wade Pfau, a

professor at the American

College of Financial Services

in King of Prussia, Pa.

For people who are years

from retirement, there is no

reason to make changes to a

long-term financial plan. But

for those in or near retire-

ment, such market moves

can be a wake-up call to put

“a strategy in place to make

sure it doesn’t derail your

retirement,” Mr. Pfau said.

It’s important to under-

stand the trade-offs, but there

are steps you can take to limit

the impact of selling stocks

when they are down, and

partly protect your portfolio.

Check In With

Your Accounts

If the market has you

spooked, consider whether

you have saved enough.

Start by estimating your

annual spending in retire-

ment. A couple who wants

$90,000 in gross income and

is entitled to $50,000 a year

in Social Security, for exam-

ple, needs $40,000 from sav-

ings. Multiply that number by

25. The result—or $1 million—
    is what the couple would have
    to save to withdraw $40,000 a
    year from a portfolio with
    50% to 75% in stocks without
    violating the 4% rule.
    That rule says you can
    spend 4% in the first year of

retirement and give yourself

an annual raise over the next

30 years for inflation with-

out running a big risk of go-

ing broke. Given today’s low

interest rates, Mr. Pfau be-

lieves the safe withdrawal

rate is around 3%. That

means the couple above

would need to save more

than $1.3 million.

Financial adviser Jona-

than Guyton argues the cou-

ple can spend 5% of an

$800,000 nest egg, provided

they can cut spending in

years after markets fall.

“You need to decide how

much conservatism you want

to bake into your approach,”

said Mr. Pfau. People who

cannot stomach the stock

market will need to save

even more in bonds, due to

today’s low interest rates.

Go More Conservative

People entering retire-

ment often have a significant

portion of savings—say, 40%

to 60%—in stocks to keep

their nest egg growing. As

they age, most gradually re-

duce stock exposure to pro-

tect against market declines.

But a study by authors in-

cluding Mr. Pfau finds those

who reduce stock exposure

in the initial years of retire-

ment—to 20% to 30%—and

then gradually raise it over

time—to 50% to 70%—are

likely to make their money

last 30 years even in the

worst market scenarios.

In contrast, those who ta-

per over retirement to 30%

in stocks from 60% are likely

to run out of money after 28

years in the 5% of worst-case

scenarios, says Mr. Pfau.

The new approach pro-

vides better downside pro-

tection in the years right af-

ter retirement, when retirees

are most vulnerable to

losses. If a bear market oc-

curs then, a portfolio can be

depleted by market losses

and withdrawals.

Of course, if stocks fare

well in the early years, the

conventional approach will

come out ahead.

Work Longer

If you are worried you

may not have enough, con-

sider postponing retirement

or returning to work, even

part time.

According to T. Rowe

Price Group Inc., a 62-year-

old with a $100,000 salary

and a $500,000 nest egg

who earns a 6% annual re-

turn could see his annual re-

tirement income from invest-

ments and Social Security

rise by 6% to 7% for every

year he remains in the work-

force, even if he saves noth-

ing additional.

Working longer allows a

person to delay tapping re-

tirement savings and reduces

the number of years in re-

tirement. For every year in

which someone puts off tak-

ing Social Security between

ages 62 and 70, benefit

checks rise by about 7% to

8% after inflation.

Cut Spending

In contrast to the 4% rule,

strategies that reduce spend-

ing when markets stumble

can help retirees better man-

age the risks of a bear mar-

ket, said Mr. Guyton, co-au-

thor of one such approach.

Say you retire with $1 mil-

lion, 60% in stocks and 40%

in bonds, and withdraw 5%,

or $50,000. At year-end, the

method calls for recalculat-

ing the withdrawal amount,

using your new balance. As-

suming your portfolio de-

clines to $800,000, the

$50,000 withdrawal—plus an

annual inflation adjust-

ment—now represents more

than 6.2% of the $800,000

balance.

Any time your withdrawal

rate exceeds 6%, the rule im-

poses a 10% withdrawal cut

for the next year, says Mr.

Guyton. After adjusting the

$50,000—to $51,000, assum-

ing 2% inflation—the person

should cut spending by 10%,

or $5,100, producing a sec-

ond-year withdrawal of

$45,900.

In years in which the

withdrawal rate is between

4% and 6%, simply adjust

your most recent withdrawal

for inflation. When the with-

drawal rate falls below 4%,

you can take a 10% raise.

Spend From Winners

Some recommend setting

aside one to five years of liv-

ing expenses in cash so as

not to have to sell stocks at

depressed prices. But low re-

turns on cash raise the risk

of depleting the nest egg,

said Mr. Pfau.

A better strategy is to use

winners after major market

moves to cover expenses. For

example, in 2008, when the

S&P 500 lost about 37%, in-

vestment-grade bonds

gained about 5%. Someone

with 60%, or $600,000, in

stocks and 40%, or

$400,000, in bonds before

the crash had 47%, or

$378,000, in stocks and 53%,

or $420,000, in bonds after-

ward.

If a retiree with such a

portfolio needed $40,000, he

would withdraw the $20,000

of bond profits. Because

bonds comprise substantially

more than 40% of the post-

crash portfolio, the investor

would take the additional

$20,000 he needs from

bonds as well. To re-estab-

lish the desired 60%-40% al-

location, he would then

transfer about $77,000 more

to stocks from bonds.

By shifting money into

beaten-down assets, rebal-

ancing helps a portfolio re-

cover faster amid a turn-

around, Mr. Pfau said.

One study looked at cutting stock exposure in the first years of retirement and raising it over time.

ZACHARY FAGENSON/REUTERS

One way is to use

winners after major

marketmovesto

cover expenses.